We initiate coverage on ELK-DESA Resources with a HOLD rating and Price Target of RM1.18, based on a 13x CY18E PE multiple. We are of the view that share price is fully-valued, taking into account potential EPS dilution arising from the recent rights issue and ICULS. The stock also lacks potential catalysts and continues to rely on organic growth. Nonetheless, with a decent dividend yield of 5.2-5.8% in FY18-19E, the stock may appeal to defensive investors.

A Consumer-focused Business Company

ELK-Desa Resources Berhad (ELK) has two business segments, notably used-car hire-purchase financing (HP financing) in the Klang Valley (differentiating itself from the big banks and competitive market) and furniture trading/manufacturing (which was started in mid-2015).

Earnings Are Supported by a Highly Profitable HP Business

ELK’s core business, the HP division, contributes to bulk of the group’s revenue (at 69%) and pre-tax profit (at 99% of group’s) (Fig 5-6). The HP business remains a highly profitable entity, with a net profit margin of circa 33-35% (based on FY12-17 earnings), effective interest rates of 13-18%, low gross NPL ratio of circa 1.5-1.6% (FY18E) while net HP receivables are expected to grow at 12-13.8% in FY18E-19E.

Catalysts Are Lacking, Outlook Remains Modest

The used car HP-industry lacks catalyst while in the medium term (FY18- 20E), we also do not foresee a significant increase in ELK’s income stream from its furniture trading and manufacturing business. Management does not have plans to further diversify its consumer-financing products apart from used-cars, hence ELK’s business growth prospects are modest in our view.

Initiate With a HOLD Rating, Price Target RM1.18 Based on 13x PE

We initiate coverage on ELK with a HOLD rating and a 12-month Price Target of RM1.18, which is pegged to a 13x P/E multiple on our CY18E EPS of RM0.91. Our P/E multiple of 13x is derived based on the average P/E multiple of ELK over the past 1 year (of which, is not comparable to other peers due to ELK’s illiquidity in the market). Downside risk – high cost-of-living may cause higher defaults. Upside risk – strict credit approvals to control NPLs.

Source: Affin Hwang Research - 5 Oct 2017